How would you characterise the evolution of regulation today?
It’s a tricky question. So much has changed in the markets post-crisis and most of the regulatory changes will be implemented in the coming years. For example, the Financial Instruments Directive (MiFID II) is due to come into effect in 2018; the implementation of the European Markets Infrastructure Regulation (EMIR) started in early 2013 but will end in 2019, with key changes in margin requirements entering into force in March 2017 at the latest. In addition, some regulatory texts, such as the Central Securities Depositaries (CSD) Regulation, still need to be finalised, while the TARGET2-Securities (T2S) migration needs to be completed before its full impact can be assessed.Regulations adopted over the last few years will have a strong impact and the industry now needs to understand the implications of this regulatory wave.
In some cases regulations will have a direct, intended impact. For example, the Alternative Investment Fund Management Directive (AIFMD) and the latest iteration of the Undertakings for the Collective Investment of Transferable Securities (UCITS V) rules confer greater investor protection obligations on investment funds, while increasing the depositary’s liabilities and reinforcing due diligence on sub-custody networks.
There are also less direct or unintended consequences. For example, market participants now face significantly higher compliance requirements with the overlapping (and sometimes duplication) of reporting obligations required in EMIR, MiFID II and Securities Financing Transactions Regulation (SFTR), to name but a few. And some regulations look insufficiently interconnected and sometimes contradictory: EMIR brings a strong incentive to clear operations through central counterparties (CCPs), while Basel III capital constraints become higher when dealing with a CCP. More time is needed to understand the changes fully.
So we see disparate sets of rules?
The G20 initially published international common requirements, but outcomes are now diverging. Disparities in local rules or local transpositions of international standards create challenges for firms operating in multiple jurisdictions. These regulatory ‘geographic silos’ also generate an operational burden. Even within Europe, where regulations are replacing directives in many circumstances, there are still grey areas where local regulations diverge.However, there is optimism (or at least a strong expectation) that these issues will be addressed. At the EU Custodian Conference in June 2016, which was supported by the European Banking Federation and BNP Paribas Securities Services, three quarters of the audience thought regulators would fine-tune the latest-adopted rules in the next three years. Half the participants thought regulators should ensure better international consistency of rules in the near future.
What is at the top of the regulator’s agenda today?
The European Commission’s main objective is to foster growth in the EU and facilitate financing for small-to-medium enterprises (SMEs). This is encapsulated in the Capital Markets Union (CMU) project, which aims to boost the efficiency of European market mechanisms and remove barriers to cross-border investments.As yet, it is uncertain whether the CMU project will generate a new regulatory wave for securities services. With regard to post-trade activity, the European Commission has set up the European Post-Trade Forum (EPTF) to review the removal of the ‘Giovannini barriers’ as defined in 2002/2003 and to ensure that no new local barriers have emerged since.
The EC will also need to articulate the CMU agenda, with the work being conducted at international level – an effort largely geared towards making the financial sector more resilient. Some of the changes being made to Basel III rules are so extensive that market commentators are dubbing them Basel IV. That may mean inconsistencies between the growth agenda of the EC and the ongoing international focus on ‘too-big-to-fail’ and rigour.
New technologies and new players are changing how business is done. How should regulators tackle the fast-moving digital environment?
Regulatory change will not be the single or even the main driver of change in the future. At the EU Custodian Conference we saw that nearly half the audience thought technology would be the first driver of change in the future, ahead of competition and the economic environment.There is no doubt that new technologies will disrupt current functioning, particularly in post-trade. Knowing to what extent, when and how this will really happen is key, but remains unclear.
Some potential areas of application are of interest, including big data technology and distributed ledger technology (or blockchain). We have seen regulators become involved at a much earlier stage with these technologies than they would have done historically. They are engaging with users and innovators, letting the ideas bloom across countries and observing them and interacting with them to help the regulatory framework and technology develop in lockstep.
Of course, there are still areas of concern around these technologies, such as scalability, the way governance needs to be set up, confidentiality and safety. Without any doubt, a major topic is cyber-security. International bodies like the Committee on Payments and Market Infrastructures (CPMI) and the Board of the International Organization of Securities Commissions (CPMI/IOSCO) and local regulators in Europe and the US have issued new guidelines for market infrastructure providers. This issue will become increasingly important with the emergence of new technologies as they can provide more security on the one hand, but on the other they can potentially amplify contagion effects in case of hacking.
If developments in technology change the structures or processes in the financial world, regulators and market participants will need to work together in order to develop market structure alongside the rules that are necessary to govern it. The pace of change will be determined by the amount of traction – or lack of it – in this process.
This article was first published on Insights, by BNP Paribas Securities Services.
